[Federal Register Volume 59, Number 22 (Wednesday, February 2, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2324]
[[Page Unknown]]
[Federal Register: February 2, 1994]
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FEDERAL RESERVE SYSTEM
12 CFR Part 231
Regulation EE; Docket No. R-0801]
Netting Eligibility for Financial Institutions
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board has adopted a rule to include certain entities under
the definition of ``financial institution'' in section 402 of the
Federal Deposit Insurance Corporation Improvement Act of 1991 so that
they will be covered by the Act's netting provisions. The Act
authorizes the Board to expand the definition of ``financial
institution'' to the extent consistent with the purposes of enhancing
efficiency and reducing systemic risk in the financial markets.
EFFECTIVE DATE: March 7, 1994.
FOR FURTHER INFORMATION CONTACT: Oliver Ireland, Associate General
Counsel (202/452-3625), or Stephanie Martin, Senior Attorney (202/452-
3198), Legal Division. For the hearing impaired only:
Telecommunications Device for the Deaf, Dorothea Thompson (202/452-
3544).
SUPPLEMENTARY INFORMATION:
Background
The Federal Deposit Insurance Corporation Improvement Act of 1991
(Act) (Pub. L. 102-242, sections 401-407; 105 Stat. 2236, 2372-3; 12
U.S.C. 4401-4407) validates netting contracts among financial
institutions. Parties to a netting contract agree that they will pay or
receive the net, rather than the gross, payment due under the netting
contract. The Act provides certainty that netting contracts will be
enforced, even in the event of the insolvency of one of the parties.
The Act's netting provisions, effective December 19, 1991, are designed
to promote efficiency and reduce systemic risk within the banking
system and financial markets.
The netting provisions apply to bilateral netting contracts between
two financial institutions and multilateral netting contracts among
members of a clearing organization. Section 402(9) of the Act defines
``financial institution'' to include a depository institution, a
securities broker or dealer, a futures commission merchant, and any
other institution as determined by the Board. In addition, the Act's
definition of ``broker or dealer'' (section 402(1)(B)) includes any
affiliate of a registered broker or dealer, to the extent consistent
with the Act, as determined by the Board.
Proposed Rule
In May 1993, the Board requested comment on a proposed regulation
that would expand the application of the Act's netting provisions to a
broader range of financial market participants (58 FR 29149, May 19,
1993). The Board proposed that persons meeting certain tests based on
market activity would qualify as ``financial institutions'' under the
Act. The proposed tests were designed to capture institutions that are
significant market participants whose coverage could enhance market
liquidity and whose failure without coverage could have systemic risk
implications. The Board chose the activity-based tests instead of tests
based on an institution's status as a regulated entity, its affiliation
with a defined financial institution, or its class of charter. As these
three latter tests likely would be both over- and under-inclusive, the
Board believed they were not as appropriate as an activity-based test.
The test proposed by the Board had both a qualitative and a
quantitative aspect. First, to qualify as a financial institution under
the proposed rule, a person1 would have to participate actively in
a financial market for its own account and hold itself out as a
counterparty that will engage in transactions both as a buyer and a
seller in the financial market. Second, the person would have to meet
one of two quantitative thresholds: It must have either (1) had one or
more financial contracts of a total gross dollar value of $1 billion in
notional principal amount outstanding on any day during the previous
15-month period with counterparties that are not its affiliates, or (2)
incurred total gross mark-to-market positions of $100 million
(aggregated across counterparties) in one or more financial contracts
on any day during the previous 15-month period with counterparties that
are not its affiliates.
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\1\``Person'' is defined broadly to include any legal entity,
such as a corporation, partnership, or individual.
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Final Rule
The final rule adopted by the Board retains the qualitative test,
in a modified form, as well as the quantitative test. Under the final
rule, a person would qualify as a financial institution if it
represents that it will engage in financial contracts as a counterparty
on both sides of one or more financial markets and meets one of the
quantitative thresholds, which are largely unchanged from the proposal.
The operation of the rule is prospective, i.e., the Act's netting
provisions will apply only to those netting contracts entered into
after a person qualifies as a financial institution. The final rule
clarifies that a person will continue to be considered a financial
institution for the purposes of any contract entered into during the
period in which it qualifies, even if the person subsequently fails to
qualify during the life of the contract. In addition, the Board has
grandfathered those netting contracts in existence on the effective
date of the final rule. If a person qualifies as a financial
institution on the effective date, that person will be considered a
financial institution for the purposes of any outstanding contract
entered into prior to that date.
The Board also made various revisions to the proposed definitions.
Those revisions are discussed in the comment summary below.
Summary of Comments
The Board received 32 comment letters (from 30 commenters) on
proposed Regulation EE. The commenters were distributed as follows:
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Type of institution Number
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Trade association............................................ 7
Federal Reserve Bank......................................... 4
Commercial bank.............................................. 4
Government-sponsored entity.................................. 3
Clearing house............................................... 2
Financial institution holding company........................ 2
Swaps dealer................................................. 3
Federal agency............................................... 2
Law firm..................................................... 1
Financial corporation........................................ 1
International agency......................................... 1
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Total.................................................... 30
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General Comments
Virtually all of the commenters supported the objectives of the
Act's netting provisions and the Board's proposed regulation. The
commenters generally agreed that broadening the Act's definition of
``financial institution'' would enhance efficiency and reduce risk in
the financial markets. Only two commenters expressed doubts as to
whether broader netting protection would decrease systemic risk.
One commenter specifically supported expansion of the definition by
rule rather than by case-by-case determinations. Two commenters
suggested that the Board should indicate in advance how it intends to
use its discretion in case-by-case determinations. The Board, however,
has set forth in the regulation the standards it believes should apply
for a person to qualify as a financial institution in most
circumstances. In case of unanticipated circumstances, the Board has
the flexibility to make case-by-case determinations based on standards
different from those in the regulation.
Qualitative Test
Fifteen commenters raised concerns about the qualitative prong of
the proposed rule's test. Eleven of these commenters argued that the
rule should cover major market participants that are end users, in
addition to covering market intermediaries. (Four commenters suggested
that the Board eliminate the test altogether, and one commenter
suggested that coverage be extended to any entity that enters into a
netting contract as defined by the Act.) The commenters stated that the
insolvency of a major end user would raise substantial settlement,
liquidity, and systemic risks and that such risks arise from the size
and nature of an entity's positions, not from the character of its
business. The commenters noted that although end users may not be
market-makers, their arbitrage strategies may cause them to take
positions on both sides of the market. The commenters observed that
including end users would provide certainty of enforceability for a
broader range of netting contracts. They stated that this broader range
of coverage would enhance market liquidity, as dealers could do a
larger volume of business with end users without raising credit limits,
and would eliminate a competitive disadvantage for end users.
The Board has determined to retain the qualitative test, in a
modified form. Although the Board recognizes that end users (as well as
their counterparties) might benefit by the netting provisions and the
failure of certain end users could create systemic risk, the Board
believes it would be difficult to justify inclusion of many end users
as ``financial institutions.'' The Act defines ``financial
institution'' to include traditional financial market intermediaries
such as banks, broker-dealers, and futures commission merchants.
Expanding the definition to cover end users would include many non-
financial corporations and, potentially, even individuals. The Board
believes it would be a stretch of the statutory definition of
``financial institution'' to include institutions or individuals that
are not market intermediaries and are not in the financial services
business.
Eleven commenters offered suggestions on how to achieve certainty
that a given entity qualifies as a financial institution. The
commenters argued that market participants would have no choice but to
rely on the representations of their counterparties in many cases. Many
commenters suggested that market participants be allowed to rely in
good faith on the written representation of a counterparty, signed by
an appropriate officer, stating that the tests were met. The commenters
argued that this ``safe harbor'' would provide certainty in instances
where a participant might otherwise refuse to deal with an institution
solely because it cannot verify the institution's qualifications.
With regard to the qualitative test, five commenters noted that, as
a practical matter, it would be difficult for counterparties to verify
that an institution participates ``actively'' in the financial markets
and holds itself out as a market intermediary. In addition, one
commenter suggested that the rule should cover certain entities that do
not enter into transactions for their own account, such as collective
investment funds and master trust arrangements that act in a fiduciary
capacity. One commenter noted that a statement from an entity that it
meets the test could be considered the equivalent of ``holding itself
out'' as a market intermediary. Other commenters suggested eliminating
the ``participates actively'' clause.
The Board agrees that an institution that represents that it is
willing to engage in transactions on both sides of the market is, in
effect, holding itself out as a market intermediary. Accordingly, the
Board has revised the language of the qualitative test to provide that
such a representation would suffice to meet the test. The Board has
eliminated that part of the proposed rule that would have required a
financial institution to participate actively in a financial market for
its own account. The Board believes that the revised final rule
provides counterparties with greater certainty that an institution
meets the qualitative test because counterparties can rely on the
institution's representation.
Three commenters made drafting suggestions, such as (1) replacing
the reference to ``buyer and seller,'' which is appropriate in a
securities market, with the more generic ``participates on both sides''
of the market, and (2) clarifying that an institution may be active in
one or more financial markets simultaneously. The Board has revised the
rule to incorporate both of these suggestions. Under Sec. 231.3(a) of
the final rule, a person meets the qualitative test if it ``represents
that it will engage in financial contracts as a counterparty on both
sides of one or more financial markets.''
Quantitative Test
Fourteen commenters cited problems with the proposed quantitative
test. Seven commenters noted that financial market participants will
have difficulty verifying whether their counterparties meet the volume
thresholds because publicly available financial statements typically do
not present information in a format that would allow verification. Five
commenters stated that small-volume dealers would be placed at a
competitive disadvantage, resulting in concentration of trading at
large dealers and barriers to entry. In addition, two commenters noted
that the test would penalize business wind-downs, as financial
institutions would cease to be covered as their contracts expired. Two
commenters argued that counterparties could circumvent the test by
engaging in reciprocal transactions to raise their outstanding
principal amounts artificially.
As a solution to the problems cited above, eight commenters
suggested that the Board eliminate the quantitative test. These
commenters stated that the qualitative test would be sufficient to
guarantee coverage of parties with a material presence in the financial
markets, so a quantitative test is unnecessary.
The purpose of the rule, however, is to further the Act's
objectives of increasing efficiency and decreasing systemic risk in the
financial markets. The qualitative test targets institutions that are
market intermediaries in order to restrict coverage to those entities
that can reasonably be included in the Act's definition of ``financial
institution.'' The qualitative test alone does not necessarily focus on
those institutions whose coverage would help achieve the Act's
objectives. The purpose of the quantitative test is to ensure that a
covered institution engages in a level of business such that its
failure to meet its obligations could create systemic risk.
The Board believes that most institutions that meet the qualitative
test engage in a volume of transactions substantially above the
quantitative test thresholds. Although institutions entering the market
may not be able to meet the quantitative test right away, the test
would aid in reducing systemic risk by helping to ensure the
creditworthiness of new market participants because they would have to
achieve a certain level of market participation without the benefit of
certainty of the validity of netting provided by the rule. In addition,
the quantitative test tends to encourage active market participation by
financial institutions by requiring them to meet certain volume
thresholds within a set period of time. The netting contracts of
institutions that are winding down their businesses would continue to
be covered as long as the institution entered into the contracts while
it qualified as a financial institution. (See discussion of timing
issues below and Sec. 231.3(b) of the final rule.) For these reasons,
the Board has retained the proposed quantitative test in Sec. 231.3(a)
(1) and (2) of the final rule.
The commenters also suggested changes in the event the quantitative
test is not eliminated. Five commenters asked that the volume
thresholds be reduced from $1 billion in notional principle to $500
million and from $100 million in gross mark-to-market positions to $50
million. As the Board does not believe these thresholds would be overly
limiting, it has not decreased the threshold levels. The Board may
reexamine the thresholds if it finds that these levels prove to be
overly limiting.
One commenter suggested that the Board establish one set of
quantitative thresholds for dealers, but allow non-dealers to be
covered at higher thresholds. As discussed above, the Board believes
that inclusion of end users, even at higher volume thresholds, would be
a stretch of the term ``financial institution.''
Another commenter suggested that the quantitative test measure
average activity levels over a 24-month period to discourage short-run
attempts to increase activity. Although using average volumes could
help discourage artificial short-run increases in activity, it would
also add more complexity to the determination of whether an institution
meets the quantitative test. Rather than focusing on one day in a 15-
month period, averaging would require surveillance of activity on a
much more frequent basis. The final rule retains the proposed ``one-
day'' test.
Several commenters suggested that the Board allow counterparties to
rely on an external auditor's certificate or that the Board redesign
the test so that a party could verify its counterparty's qualifications
by examining publicly available information. The Board believes that
institutions desiring to qualify as financial institutions under the
rule will have a strong incentive to present information in publicly
available documents, such as financial reports, showing that the
institution meets the quantitative test. These reports could be
verified by an outside auditor, if the participants so desire.
One commenter suggested that, for the purposes of the quantitative
test, the Board should treat the aggregate risk of an affiliated group
as one entity, i.e. an institution would qualify as a financial
institution if it meets the qualitative test and it and/or its
affiliates meet the quantitative test. If an institution fails to meet
its obligations, however, those obligations are not automatically
assumed by its affiliates, even though in some cases a holding company,
for example, may make contributions to a troubled subsidiary. The Board
believes that treating each institution separately under the rule
reflects more closely the risk that institution poses for its
counterparties.
Two commenters requested that the Board allow the quantitative test
to be satisfied by financial contracts from several financial markets,
even though the institution may not satisfy the qualitative test for
each one of those financial markets. The rule would allow aggregation
of financial contracts across markets for purposes of the quantitative
test, but would not require an institution to meet the qualitative test
for each type of its financial contracts. For example, an institution
might meet the qualitative test by representing that it will engage in
foreign exchange contracts on both sides of the market and meet the
quantitative test with both its foreign exchange and interest rate
contracts. The institution would nevertheless qualify as a financial
institution, and all of its netting contracts would be subject to the
Act's protection.
Finally, in Sec. 231.3(a)(2), the Board has changed the word
``incurred'' to ``had'' to clarify that the contracts that yield mark-
to-market positions of $100 million need not be entered into on a
single day. Rather, the $100 million refers to positions in outstanding
contracts on a single day.
Charter Test
Six commenters suggested that the Board supplement the market
activity tests with charter tests. The commenters argued that charter
tests are consistent with the approach taken in the Act and are
competitively neutral for each charter type. The commenters did not
agree with the Board's statement that charter tests would foster
inaccurate presumptions about the riskiness of covered institutions.
Rather, they believed that charter tests would promote certainty
without harmful results. The commenters requested coverage for a
variety of charter types, including bank holding companies and their
subsidiaries, insurance companies, foreign banks (rather than solely
their U.S. branches and agencies), affiliates of registered broker-
dealers, trust companies, Federal Reserve Banks, Federal Home Loan
Banks, and certain government-sponsored entities.
The Board has determined not to expand the rule's coverage through
charter tests. Charter tests would include many end user institutions
that are not market intermediaries, which the Board believes would
stretch beyond the meaning of ``financial institution.'' A charter test
would also cover many institutions whose business volumes do not give
rise to systemic risk considerations. Although Congress used charter
tests in the Act, the Board does not believe that charter tests are
necessarily the most appropriate means to expand Congress' definition.
There may be certain end user institutions that reasonably can be
described as financial institutions even though they are not market
intermediaries. The Board has the ability to make case-by-case
determinations in these instances and has done so. For example, in
1992, the Board made individual determinations in the cases of three
CHIPS members. Similarly, there may be certain government-sponsored
entities or international organizations that do not meet the
requirements of the rule yet could reasonably be considered financial
institutions due to their roles in the financial markets. The Board
would consider making individual determinations in such cases.
Definitions
The commenters also made various technical suggestions concerning
the definitions. One commenter suggested that, in the definition of
``affiliate,'' the Board replace the word ``dealer'' with ``person.''
The Board has revised the definition in Sec. 231.2(b) accordingly.
Two commenters requested that the Board revise the definition of
``gross mark-to-market positions'' to replace the word ``price'' with
``value'' to clarify that market participants may use their normal
market valuation methods rather than the method used to price each
transaction at its inception. Section 231.2(e) of the final rule
reflects this revision.
Six commenters requested that the definition of ``person''
explicitly include an entity organized outside the U.S., thereby
assuring that foreign banks and other foreign market participants could
qualify as financial institutions. Another commenter asked that the
definition explicitly include trusts and that ``similar entity'' be
changed to the more general ``other entity.'' The Board intends that
``person'' be defined broadly to include all entities, foreign and
domestic, and has revised the definition in Sec. 231.2(f) to
incorporate both of these comments.
One commenter suggested that the Board include a comprehensive
description of the financial institutions defined by the Act as well as
those defined by the regulation. However, to keep the rule as simple as
possible, the Board has not included the Act's definitions. Section
231.1(b) of the rule specifically states that the rule does not affect
the status of those financial institutions defined by the Act.
One commenter suggested that the Act's definition of netting
contract also be used in the regulation, rather than the proposed
``financial contract'' definition, which is based on the Federal
Deposit Insurance Act's (FDIA's) definition of qualified financial
contract. The commenter believed that using a common definition would
reduce confusion and avoid litigation. The final rule retains the
concept of a financial contract based on the FDIA. The concept of a
financial contract narrows the focus of the rule to participants in the
financial markets and is relevant only to the determination of whether
a particular institution qualifies as a financial institution under the
rule. Once an institution qualifies, the Act's netting provisions would
apply to all of that institution's netting contracts, as defined by the
Act.
The Board has expanded upon the FDIA to include spot forward
contracts (contracts with maturities of two days or less) as financial
contracts for purposes of the qualitative and quantitative tests.
Arguably, the FDIA definition of swap agreement already includes spot
forward contracts, however, for purposes of clarity, the Board has
included spot contracts expressly in the forward contract definition.
Timing Issues
Many commenters raised timing-related issues regarding the rule's
coverage. Eight commenters requested that the Board clarify that the
Act's netting provisions will apply for the life of a contract as long
as the parties qualify as financial institutions at the time they enter
into the contract. The Board has revised the rule to clarify that a
person will continue to be considered a financial institution for the
purposes of any contract entered into during the period it qualifies,
even if the person subsequently fails to qualify. (See Sec. 231.3(b).)
Four commenters suggested that the Board clarify that an
institution's status as a financial institution will be determined at
the time it enters into a netting contract because that is when the
counterparty will evaluate the institution's creditworthiness. On the
other hand, two commenters suggested that the netting provisions should
be applied retroactively to an institution's existing contracts once it
qualifies as a financial institution. One commenter requested
clarification as to whether existing contracts will be grandfathered
when the rule takes effect. Under the final rule, the Act's netting
provisions will apply only to those netting contracts entered into
after a person qualifies as a financial institution. However, the Board
has revised the rule to grandfather those contracts in existence on the
effective date of the final rule for entities qualifying under the rule
at that time. (See Sec. 231.3(c).)
One commenter requested that the Board define the 15-month rolling
period in the quantitative test with reference to the time parties
enter into a master agreement, not the time of the first transaction
under that agreement. In the absence of a master agreement, the
commenter suggested that the period be measured with reference to a
particular netting transaction. In practice, to determine whether a
party meets the quantitative test, the 15-month period will date back
from the day a party enters into a netting contract, whether or not
that netting contract is a master agreement. Thus, on a particular day
(``Day X''), a party meets the quantitative test if its financial
contracts, as defined in the rule, met one of the rule's threshold
levels on any day during the previous 15 months. Assuming the party
qualifies as a financial institution and enters into a netting
contract, as defined in the Act, on Day X, Sec. 231.3(b) of the rule
provides that the netting contract will be covered by the Act's
provisions regardless of whether the party ceases to qualify as a
financial institution on a subsequent day. If the netting contract that
the party enters into on Day X is a master agreement, e.g., an
agreement to net specified types of underlying transactions that the
counterparties may enter into in the future, Sec. 231.3(b) would
provide that netting under that master agreement would continue to be
protected under the Act even though the party enters into individual
underlying transactions after it ceases to qualify as a financial
institution. The Act's provisions would not extend to netting under any
new master agreement entered into after the party ceases to qualify as
a financial institution.
Board List.
Two commenters requested that the Board keep a list of entities
that have declared themselves to be financial institutions. The Board
believes that the commenters' concerns about lack of certainty are
largely addressed by allowing counterparties to rely on an
institution's representation that it will act as a market intermediary
and creating an incentive for institutions to publish volume threshold
information to establish that they meet the quantitative test. Thus,
the Board does not believe an ``official'' list is necessary.
Automatic Stays.
Section 405 of the Act provides that no injunction or similar order
issued by a court or agency will interfere with the application of
netting. One commenter believed that section 405 could be interpreted
so as not to override provisions for automatic stays in bankruptcy
under federal or state law. The commenter asked that the Board indicate
its view on this matter. Although the Board cannot authoritatively
interpret the provisions of the Act, the Board believes the intent of
the Act is to override the automatic statutory bankruptcy stays for
valid netting contracts. Sections 403 and 404 of the Act explicitly
provide that netting is effective ``notwithstanding any other provision
of law.'' The Board believes that section 405 was included to clarify
that the netting provisions override court or agency actions in
addition to overriding statutory law.
CFTC Comment.
The Commodity Futures Trading Commission (CFTC) noted that it can
exempt certain contracts between ``appropriate persons'' from the
Commodity Exchange Act's (CEA's) exchange-trading requirement and has
done so for certain swaps, hybrid instruments, and energy contracts.
The CFTC may also exempt appropriate multilateral netting arrangements,
in which case the arrangement may not meet the Act's definition of
clearing organization, which refers to an organization that ``performs
clearing functions for a contract market designated pursuant to the
CEA.'' The CFTC stated that it would like to work with the Board to
ensure that a clearing organization exempted by the CFTC would be
covered by the Act's netting provisions. The Board is willing to work
with the CFTC in this area.
Final Regulatory Flexibility Analysis
Two of the three requirements of a final regulatory flexibility
analysis (5 U.S.C. 604), (1) a succinct statement of the need for and
the objectives of the rule and (2) a summary of the issues raised by
the public comments, the agency's assessment of the issues, and a
statement of the changes made in the final rule in response to the
comments, are discussed above. The third requirement of a final
regulatory flexibility analysis is a description of significant
alternatives to the rule that would minimize the rule's economic impact
on small entities and reasons why the alternatives were rejected.
The rule, however, should not have an economic impact on small
entities. The rule will apply only to entities with financial contracts
of $1 billion in gross notional principal amount or gross mark-to-
market positions of $100 million over a period of 15 months. Entities
with a smaller level of market activity would not be covered by the
Board's expanded definition of ``financial institution.'' Many small
market participants are included in the Act's definition of ``financial
institution'' and thus are already covered by the netting provisions.
The Board limited its expansion of the Act's definition to entities
with a relatively large volume of activity because the lack of netting
coverage for small entities is unlikely to affect overall market
efficiency or systemic risk.
List of Subjects in 12 CFR Part 231
Banks, banking, Financial institutions, Netting.
For the reasons set out in the preamble, the Board adds a new part
231 to Title 12, Chapter II of the Code of Federal Regulations to read
as follows:
PART 231--NETTING ELIGIBILITY FOR FINANCIAL INSTITUTIONS REGULATION
EE
Sec.
231.1 Authority, purpose, and scope.
231.2 Definitions.
231.3 Qualification as a financial institution.
Authority: 12 U.S.C. 4402(1)(B) and 4402(9).
Sec. 231.1 Authority, purpose, and scope.
(a) Authority. This part (Regulation EE; 12 CFR part 231) is issued
by the Board of Governors of the Federal Reserve System under the
authority of sections 402(1)(B) and 402(9) of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4402(1)(B) and
4402(9)).
(b) Purpose and scope. The purpose of the Act and this part is to
enhance efficiency and reduce systemic risk in the financial markets.
This part expands the Act's definition of ``financial institution'' to
allow more financial market participants to avail themselves of the
netting provisions set forth in sections 401-407 of the Act (12 U.S.C.
4401-4407). This part does not affect the status of those financial
institutions specifically defined in the Act.
Sec. 231.2 Definitions.
As used in this part, unless the context requires otherwise:
(a) Act means the Federal Deposit Insurance Corporation Improvement
Act of 1991 (Pub. L. 102-242, 105 Stat. 2236), as amended.
(b) Affiliate, with respect to a person, means any other person
that controls, is controlled by, or is under common control with the
person.
(c) Financial contract means a qualified financial contract as
defined in section 11(e)(8)(D) of the Federal Deposit Insurance Act (12
U.S.C. 1821(e)(8)(D)), as amended, except that a forward contract
includes a contract with a maturity date two days or less after the
date the contract is entered into (i.e., a ``spot'' contract).
(d) Financial market means a market for a financial contract.
(e) Gross mark-to-market positions in one or more financial
contracts means the sum of the absolute values of positions in those
contracts, adjusted to reflect the market values of those positions in
accordance with the methods used by the parties to each contract to
value the contract.
(f) Person means any legal entity, foreign or domestic, including a
corporation, unincorporated company, partnership, government unit or
instrumentality, trust, natural person, or any other entity or
organization.
Sec. 231.3 Qualification as a financial institution.
(a) A person qualifies as a financial institution for purposes of
sections 401-407 of the Act if it represents that it will engage in
financial contracts as a counterparty on both sides of one or more
financial markets and either--
(1) Had one or more financial contracts of a total gross dollar
value of at least $1 billion in notional principal amount outstanding
on any day during the previous 15-month period with counterparties that
are not its affiliates; or
(2) Had total gross mark-to-market positions of at least $100
million (aggregated across counterparties) in one or more financial
contracts on any day during the previous 15-month period with
counterparties that are not its affiliates.
(b) If a person qualifies as a financial institution under
paragraph (a) of this section, that person will be considered a
financial institution for the purposes of any contract entered into
during the period it qualifies, even if the person subsequently fails
to qualify.
(c) If a person qualifies as a financial institution under
paragraph (a) of this section on March 7, 1994, that person will be
considered a financial institution for the purposes of any outstanding
contract entered into prior to March 7, 1994.
By order of the Board of Governors of the Federal Reserve
System, January 27, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-2324 Filed 2-1-94; 8:45 am]
BILLING CODE 6210-01-P
